Question

In 2018, the Marion Company purchased land containing a mineral mine for $2,050,000. Additional costs of $843,000 were incurred to develop the mine. Geologists estimated that 490,000 tons of ore would be extracted. After the ore is removed, the land will have a resale value of $100,000.

To aid in the extraction, Marion built various structures and small storage buildings on the site at a cost of $205,800. These structures have a useful life of 10 years. The structures cannot be moved after the ore has been removed and will be left at the site. In addition, new equipment costing $77,500 was purchased and installed at the site. Marion does not plan to move the equipment to another site, but estimates that it can be sold at auction for $4,000 after the mining project is completed.

In 2018, 59,000 tons of ore were extracted and sold. In 2019, the estimate of total tons of ore in the mine was revised from 490,000 to 577,500. During 2019, 89,000 tons were extracted, of which 69,000 tons were sold.

Required:

1. Compute depletion and depreciation of the mine and the mining facilities and equipment for 2018 and 2019. Marion uses the units-of-production method to determine depreciation on mining facilities and equipment.

Answer 1

	Cost of Mineral Mine
	Purchase Price		$2,050,000
	Development Costs		$843,000
			$2,893,000
	2018 Depletion
	Depletion per ton = ($2893000-100000)/490000
			5.70
	2018 Depletion = $5.70*59000			336300
	2019 Depletion
	Revised Depletion Rate = ((2893000-336300)-100000)/(577500-59000)
			4.74
	2019 Depletion = $4.74*89000			421690.07
	2018 Depreciation for Structures
	Depreciation per ton = 205800/490000				0.420
	2018 Depreciation =0.42*59000				24780
	2019 Depreciation for structures
	Revised Depreciation Rate = (205800-24780)/(577500-59000)						0.349
	2019 Depreciation 0.349*89000			31071.90
	2018 Depreciation for equipment
	Depreciation per ton = (77500-4000)/490000					0.150
	2018 Depreciation = 0.15*59000					8850
	2019 Depreciation for equipment
	Revised Depreciation Rate = (77500-4000-8850)/(577500-59000)						0.125
	2019 Depreciation = 0.125*89000						11097.11
				2018	2019
	Depletion			336300	421690.07
	Depreciation for Structures			24780	31071.90
	Depreciation for Equipment			8850	11097.11
	the figure has been rounded to two decimal points in absence of any information